RBC Starts BATS At Underperform, Sets $23 Target

RBC Capital’s Andrew Bond believes Bats Global Markets Inc BATS's current stock valuation “above the sector average is unwarranted given its concentration in highly competitive businesses, as well as its reliance on difficult to defend SIP fees to generate earnings.”

Bond initiated coverage of the company with an Underperform rating and a price target of $23.

High Competition, Mature Market

The analyst believes growth is likely to be more difficult for the company to achieve, given its concentration in intensely competitive and mature asset classes.

Bond estimates 50 percent of Bats Global Markets’ net income is generated from consolidated tape revenue (SIP), which is mainly linked to market share and could face pressure due to the constantly increasing competition.

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In addition, 90 percent of the company’s net transaction revenue comes from the intensely competitive cash markets, which Bond said were his least preferred asset classes among exchanges, given that they face the highest competition and lowest pricing power.

Areas Of Concern

However, according to the RBC Capital report, “Despite pricing that is well below peers in all of its markets, BATS market share has remained flat in US and European equities.”

The analyst also pointed out that since bank balance sheet continue to be under pressure, slower volume growth and globally cheaper data would limit revenue growth from SIP.

“Further, we question the SIP's longer-term viability as exchanges continue to focus on selling higher priced and less latent data to its largest customers, high frequency traders,” Bond added.